April 3 (Reuters) - A federal judge has rejected a bid by
Wells Fargo & Co to dismiss a lawsuit by investors who
said it failed in its role as trustee for debt issued by a
financing company that collapsed in 2009 in an estimated
billion-dollar fraud.

A 50-page decision by U.S. District Judge David Carter in
Santa Ana, California on Tuesday clears the way for a possible
trial against the fourth-largest U.S. bank over its dealings
with Medical Capital Holdings Inc.

The judge also ruled outright for the investors on some
claims in the class action, and dismissed other claims against
San Francisco-based Wells Fargo.

Investors contended that Wells Fargo was supposed to
disburse money so that Medical Capital could offer financing to
medical care providers by purchasing their outstanding
receivables.

Instead, they said the bank failed to stop Medical Capital
from diverting their money to such things as non-medical
projects and excessive administrative fees.

"It is a tremendous result for us to be able to go forward
on claims that could total hundreds of millions of dollars,"
Mark Molumphy, a lawyer at Cotchett Pitre & McCarthy who
represents the investors, said in a Wednesday phone interview.

A Wells Fargo spokesman did not immediately respond on
Wednesday to requests for comment.

Carter ruled six weeks after Bank of New York Mellon Co
said it would pay $114 million to settle claims over its
own role as a trustee for Medical Capital debt.

According to court papers, Medical Capital had raised $1.7
billion from more than 20,000 investors from 2003 to July 2009,
when the U.S. Securities and Exchange Commission sued the
Tustin, California-based company and two executives for fraud.

Medical Capital was soon shut down. A receiver later found
that investors lost between $839 million and $1.08 billion, and
that the company had used a "Ponzi-like scheme" to extract
excess fees. ()

GENUINE DISPUTE

In the Wells Fargo case, investors had bought notes issued
by three Medical Capital special purpose companies for which
Wells Fargo was trustee.

These investors accused Wells Fargo of 63 separate breaches,
including failing to declare events of default and disbursing
funds to Medical Capital based on inaccurate, incomplete or
missing documentation.

Wells Fargo has argued that it neither acted in bad faith,
nor acted negligently in performing its contractual obligations.

"Plaintiffs have deposed every Wells Fargo employee they
could think of," the bank's lawyers said in a Feb. 11 filing.

"There is no evidence that any of them knew of wrongdoing by
Medical Capital, or even suspected wrongdoing" until 2009, after
payment defaults and the SEC probe had begun, the lawyers added.

In his decision, Carter nonetheless said the noteholders
"have shown a genuine dispute as to whether any breach by Wells
Fargo was a cause-in-fact of their losses."

He also said they could pursue a claim that Wells Fargo
distributed some funds in bad faith.

Joseph Lampariello, a former Medical Capital president, last
May pleaded guilty to criminal wire fraud related to the alleged
scheme. He has yet to be sentenced, court records show.